Kids Want iPads, Not Toys

Research firm NPD Group’s recent toy industry report showed that overall toy sales in the U.S. fell 0.6% last year. The industry was able to contain the decline in sales due to stronger demand reported in the last two weeks of the year, when sales grew 10% over the year. Overall, domestic toy sales last year were $16.5 billion, compared with $16.6 billion a year ago. The decline in the toy industry is attributed not only to the continuing weak economy, but also to the growing impact of mobile devices, which have become the ‘toys’ of choice for children. A Nielsen study conducted during the holiday season last year found that for kids aged 6 to 12, their most desired gift was an iPad. To successfully compete in such an environment, most toy makers are aligning themselves to this trend by either releasing their own mobile device versions or by developing versions of their existing games that can interact with the iPad and similar devices.

LeapFrog’s Financials

Electronic educational toy maker LeapFrog’s (NYSE:LF) Q4 revenues grew 16% over the year to $244.7 million, surpassing market expectations of $224.5 million. EPS of $0.89 was also ahead of the market’s projected earnings and the previous year’s earnings of $0.49 per share.

For the current quarter, they project revenue growth of up to 10% over the year, with a loss of $0.07-$0.09 per share. The market was expecting revenues to decline 5% over the year during the current quarter, with a loss of $0.12 per share.

They ended the year with revenues up 28% over the year to $581.3 million. U.S. revenues grew 24% to $424.8 million and international revenues grew 38% to $156.5 million. Adjusted EBITDA grew 89% over the year to $93.1 million.

LeapFrog has been successful due to their range of products that cater to the digital market trends. Last year, LeapFrog had four of the top 10 selling toys in the U.S. In the UK, two of their toys were on the top ten toys list. The leading toys on the U.S. list included their tablet and LeapPad related toys. Leapster Explorer Licensed Software Asst which was ranked first, their LeapPad Explorer System ranked third, LeapPad2 Tablet System ranked fourth and the LeapPad2 Special Hardware Plus Bundle ranked ninth. In fact, LeapPad 2 was also ranked as the leading toy in UK and the number one selling kids tablet in the country. During the annual Toy Industry Association’s Toy of the Year Awards ceremony held last month, LeapFrog’s LeapPad2 was awarded the leading position in children’s learning tablets by winning the People’s Choice Toy of the Year award.

LeapFrog’s Growing Digital Content

Their digital content has grown significantly over the past few years. They now have a selection of more than 475 titles, including in-house developed content and content from 30 media partners. They now have more than 13 million connected kids and families to their network.

They recently partnered with Disney Publishing Worldwide to release interactive e-books as part of their third-party developer program. Through the tie-up, LeapFrog will be able to include “Doc McStuffins: Rundown Racecar” and “Wreck-It Ralph: Sugar Rush” for purchase as part of LeapFrog’s eBooks selection. The titles will be available for purchase at $5.00 each and will be focused on children aged three and older.

LeapFrog’s International Expansion

LeapFrog is focusing on international growth as their next market of opportunity. Last year, they launched LeapPad in France and French-speaking Canada for the first time, to positive reviews. International sales have seen strong growth and reported an annual growth rate of more than 33% over the past two years. The company plans to increase investment to develop localized products for the newer markets that they will expand into in 2014.

LeapFrog’s stock is trading $8.59 with a market capitalization of $581.79 million. It touched a 52-week high of $12.28 in July 2012.